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TI M B E R [ Gateway ]

A S S E T

From left to right: Corrado Russo, Managing Director, Investments/Global Head of Securities, Ugo Bizzarri, Founding Managing Director, Portfolio Management and Investments, Andrew Jones, Managing Director, Debt Investments

12 august 2012

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ounded in 1999, Timbercreek Asset Management began business by investing in and managing multifamily residential properties. The founders believed that this class of properties offered the best return on investment, as it has proven to be a relatively stable market that provides a steady stream of cash flow at relatively low risk. This investment strategy has enabled Timbercreek to grow its portfolio to more than 17,000 units in 27 cities throughout Alberta, Manitoba, Ontario, Quebec and Nova Scotia. This includes a recent transaction with TransGlobe Apartment REIT, which involved the acquisition of 26 properties with approximately 5,400 units.

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[ Timbercreek ]

Timbercreek has been able to use its knowledge of “bricks-andmortar” investing to become more than a property manager. The company has developed a full-service asset and property management platform. Timbercreek directly controls the management of its real estate investments. Its dedicated property management platform ensures that the organization has professionals in place to manage its multi-family residential properties. Timbercreek supports its employees and manages its properties with 14 regional offices across Canada. “We are very careful about managing our growth, which is why we believe in building a good team, establishing infrastructure and providing good governance,” said Ugo Bizzarri, Founding Managing Director, Portfolio Management and Investments. “As a result, we will set up property management and asset management teams before we purchase a property.” Timbercreek funds its real estate purchases primarily using institutional capital. It also employs a twofold strategy with respect to property investment and management. First, the company makes direct investments in stable properties, which it then actively manages to maintain and/or improve (providing the added benefit of solidifying tenant relations). Second, Timbercreek makes direct investments in properties that are either mismanaged or undercapitalized, which enables it to renew and reposition the properties to improve their value (and also strengthen tenant satisfaction). These strategies have contributed to growing Timbercreek’s investment in direct real estate to more than $2 billion.

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“The recession has enabled us to acquire quality real estate at fair prices, as other companies were not doing a lot of purchasing,” said Ugo. “We have a value-oriented investment strategy and an active management style focused on identifying strong, stable cash flow generated by investment-grade real estate. Timbercreek has earned a reputation for providing conservatively managed, risk-averse investment opportunities to institutions, discretionary advisors and qualified individuals.”

Timbercreek Mortgage Investment Corporation In 2007, Timbercreek decided to take advantage of an untapped opportunity in the lending market by launching a small private mortgage fund. Both investors and borrowers responded very positively to the fund. As a result, in July 2008, Timbercreek launched its first publicly traded mortgage fund, Timbercreek Mortgage Investment Corporation (TSX: TMC). Management recognized a need for short-term, highquality, customized loans to experienced real estate investors whose requirements were not being met by the banks. The company uses its knowledge of purchasing real estate, as well as its experience with and understanding of the fundamentals behind the asset class, to make mortgage lending decisions. “We decided to enter the lending market, and to launch this fund, because we identified a significant opportunity in the non-bank lending space,” said Andrew Jones, Managing Director, Debt Investments.

Timbercreek Mortgage Investment Corporation

Structure Publicly Traded Mortgage Investment Corporation (TSX: TMC) Investment Objective Capital preservation, stable cash flow Strategy Invest in a diversified portfolio of higher-yielding mortgage loans secured by commercial real estate that is primarily income producing and situated in urban markets Cash Distribution Current net annualized yield: 7.6%* Long-term target: 550 basis points above the 2-year Government of Canada bond yield Paid monthly (Primarily taxed as interest income)

14 august 2012

Liquidity Redeemable monthly or annually Eligibility RRSPs, RRIFs, DPSPs, RDSPs, RESPs, TFSAs Hurdle Rate 2-year Government of Canada Bond Yield plus 450 basis points Performance Fee 20% carried interest over hurdle rate Management Fee 1.2% per annum of the gross assets of the Fund *Based on $10 issue price


[ Timbercreek ]

“There were a lot of private lenders who were loaning money at very high rates, so we focused on picking the best deals and offering slightly better rates...” “There were a lot of private lenders who were loaning money at very high rates, so we focused on picking the best deals and offering slightly better rates (often in the 10% range), and we were still able to deliver a very attractive return to investors.” The Timbercreek Mortgage Investment Corporation leverages the company’s real estate management infrastructure for local market knowledge and economic trends, as well as new lending opportunities. The fund’s primary goal is the preservation of investors’ capital, as well as generating good, stable returns in monthly distributions to shareholders. The Timbercreek Mortgage Investment Corporation offers first and second mortgages (from $500,000 to $20 million), up to 85% loan-tovalue. The fund typically offers these mortgages as short-term loans (one to three years) to borrowers that need financing for various purposes.

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Loans are very flexible, as the fund offers a variety of prepayment and amortization options. “Since the loans are relatively short term, there is very quick turnover of funds, which is why we rely on having very good deal flow from our origination team to keep the portfolio invested,” said Andrew. “The business has grown rather quickly, primarily due to our dedication to great service. We provide very quick turnaround time and respond promptly to borrower requests, which often helps us to win the deal.”

Timbercreek Senior Mortgage Investment Corporation Prior to January 2012, Timbercreek found that they were passing on a significant number of mortgage opportunities when they did not fit within the guidelines of the Timbercreek Mortgage Investment Corporation.

Timbercreek Senior Mortgage Investment Corporation

Structure Publicly Traded Mortgage Investment Corporation (TSX: MTG)

2-year Government of Canada bond yield Paid monthly (Primarily taxed as interest income)

Investment Objective Capital preservation, stable cash flow

Liquidity Redeemable monthly or annually

Strategy Invest in a diversified portfolio of first mortgages loans secured by commercial real estate that is primarily income producing and located in urban markets

Eligibility RRSPs, RRIFs, DPSPs, RDSPs, RESPs, TFSAs

Cash Distribution Current net annualized yield: 6%* Long-term target: 350 basis points above the

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Management Fee 1% per annum of the net assets of the Fund *Based on $10 issue price


[ Timbercreek ]

As a result, the company launched the Timbercreek Senior Mortgage Investment Corporation (TSX: MTG) to take advantage of this growing opportunity. Timbercreek is now one of the largest non-bank, mortgage lenders in Canada, managing two funds that currently total more than $700 million in equity. The Timbercreek Senior Mortgage Investment Corporation provides only first mortgages at a lower interest rate but only up to a target of 65% loan-to-value. Loans are typically larger ($5–30 million or more) and for slightly longer terms (three to five years). These loans are typically used to finance larger developments, such as office, retail and industrial properties, as well as residential real estate purchases. “We have found that there is more demand for this type of loan, so the Senior fund is growing more quickly than our original mortgage fund,” said Andrew. “Borrowers will often use this mortgage as a bridge loan, as we allow the flexibility to repay the loan early.” Both mortgage funds depend upon a solid back office infrastructure, with a dedicated mortgage group including originators, underwriters and funders, as well as other employees providing support in various areas. The company sends an employee to visit each site prior to loan approval to assess the property. The group’s team of analysts will review key information (such as tenant quality and vacancy rates), and perform

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due diligence on all financial data. An independent credit committee employs a rigorous review process before approving any mortgage investment opportunities. “We have a lot of resources to pull from, including an in-house accounting and servicing group, an internal marketing department that provides information to borrowers and investors, and a capital markets team,” said Andrew. “As we also provide property management, we can access local information on any properties in which we have interest, and can even take over a property when necessary.”

Timbercreek Global Real Estate Fund To take advantage of global real estate opportunities, and leverage its real estate knowledge in other markets, the company launched the Timbercreek Global Real Estate Fund (TSX: TGF.UN) in 2010. The fund invests in top quality real estate securities, and has a current value of $108 million in assets. This includes common equity, preferred shares and debt of real estate companies, both public and private, in countries around the world, including Canada, the US, UK, Japan, Australia, Hong Kong and several European nations. The goal of the fund is to preserve unitholders’ capital and provide annual cash distributions of 7% (net of all taxes, fees, etc.).

Timbercreek Global Real Estate Fund

Structure Publicly traded closed-end fund (TSX: TGF.UN)

Eligibility RRSPs, RRIFs, DPSPs, RDSPs, RESPs, TFSAs

Investment Objective Stable cash flow, capital preservation

Management Fee

Strategy Invest directly in a diversified portfolio of prime real estate securities including common equity, preferred shares and debt of both private and public real estate investment trusts and real estate companies in developed countries around the world Targeted Return Aggregate annualized yield of 7% plus capital appreciation Liquidity Redeemable monthly or annually

18 august 2012

- 0% of Net Asset Value per annum in years in which the Total Return is negative - 1.25% of Net Asset Value per annum in years in which the Total Return is between 0% and 7.99% - 1.5% of Net Asset Value per annum in years in which the Total Return is between 8% and 11.99% - 1.8% of Net Asset Value per annum in years in which the Total Return is in excess of 12% Service Fee 0.40% service fee per annum


[ Timbercreek ]

“There are a lot of good opportunities that have enabled us to put our capital to work outside Canada and generate stable income for our investors...” “We look for companies around the world to invest in that own good real estate in attractive markets with strong managers,” said Corrado Russo, Managing Director, Investments/Global Head of Securities. “We are interested in companies that trade below their net asset value, and also invest directly in buildings that can be improved to add value.” The Global Real Estate Fund purchases a wide range of quality real estate in different markets as part of its goal to create a diversified portfolio. Diversification is accomplished by adding investments to the portfolio that have low correlation to each other. The fund diversifies its purchases by market (i.e., by buying real estate in Canada, the US, Europe and Singapore) and will move capital to locations where property values are in the recovery phase, not at the top of the market. The Global Real Estate Fund also diversifies by asset class, as it invests in preferred shares, publicly traded debt and private placements. This includes buying equity in companies that own quality real estate. The fund combines public and private equity to provide more diversity, as both types of equity offer different benefits. Publicly traded securities provide greater liquidity and the ability to move capital, as well as the

20 august 2012

option to sell when there are issues. As they are affected by market fluctuations, public securities are subject to greater volatility. “The fund also has about 20% in private investments, which serves to anchor the overall fund, as they are not marked to market every day,” said Corrado. “Debt instruments enhance the fund’s yield and stability, and overall the fund’s capital appreciation has outpaced inflation, so the distribution yield of 7% is a real return.” The Global Real Estate Fund follows the Timbercreek model of investing in real estate – good location, quality of asset base and ability to purchase at a discount. Returns are realized by taking advantage of uncertainty and volatility in the market. The fund buys real estate at large discounts to achieve better yields. However, the market closes the discount gap over time, and large institutions are buying companies to gain access to their valuable real estate. So the fund has to do its research and find opportunities ahead of the general public. How does the Global Real Estate Fund find quality real estate around the world? It has established and experienced personnel on the ground


[ Timbercreek ]

“The plan is to launch at least one opportunity fund that will focus on the US multi-family market space. We are also examining lending opportunities in the US and Europe.” in key locations. The fund has securities teams in Toronto, New York, Zurich and Melbourne, which enables it to have team members close to its investments. Their people can check out real estate (and investment opportunities) around the globe, visit with property management teams to find out what is going on at the properties, and determine the competence of real estate and asset managers.

Future Plans

“We can also evaluate the fundamentals of the investment property, such as new supply, rent growth, etc.,” said Corrado. “We have a definite competitive advantage when it comes to purchasing and investing in global real estate, as we have people on the ground who visit the properties and determine whether they are worth the investment.”

As the Senior Mortgage Investment Corporation is relatively new, Timbercreek plans to work on growing the fund. The company will carry on with raising funds when necessary, and market the fund to increase public knowledge. The company will also develop the Mortgage Investment Corporation by diversifying into other mortgage and debt-related opportunities, and review lending opportunities in the US and abroad.

Those who manage the Global Real Estate Fund will take the information from its various team members to make investment decisions. Key discussions revolve around the true value of the assets, and not the price of the companies’ stock that own those assets. Management will evaluate the asset to determine if valuations are cyclical, and what catalysts will affect the discounted value of the investment.

Timbercreek plans to continue managing and deploying its funds along the same strategic path as it has for the last 12 years. The company will grow the funds by purchasing real estate and alternative investments that provide its investors with value. It will also continue to renovate and capitalize on underperforming assets.

“We plan to continue increasing the size of the Senior Mortgage Investment Corporation, as more money is necessary to ensure proper diversification, given that the deals in this fund are generally larger loans,” said Andrew. “We intend to grow it to about $700 million, which is doable as there is a bigger market for this type of fund.”

Since the fund is based on a global portfolio, various factors that do not occur in other funds will affect its value. Management has to contend with currency risk, the variability in the transparency of other companies’ data, different management styles and various business models. Timbercreek focuses on companies that are both owners and managers of their own assets, rather than companies that have different management styles. Additionally, the company leverages its global team members to help manage these various factors.

The Global Real Estate Fund will continue to pursue slow, steady growth, and go to market a few times per year to raise the required funds to make new purchases. The fund does not intend to raise too much money that will sit around unused, so managers will take their time to find the right investments before raising the necessary funds. The current goal is to grow the fund to $300 million and then maintain its pace of growth. The fund will continue to expand internationally, and take advantage of opportunities as they arise in the US, Europe and Asia.

“The Global Real Estate Fund is primarily interested in companies that own and operate the buildings in their portfolio, especially multi-family residences where the owners collect and pay rent as dividends,” said Corrado. “There are a lot of good opportunities that have enabled us to put our capital to work outside Canada and generate stable income for our investors.”

“Timbercreek is currently examining new investment opportunities in the United States and throughout Europe,” added Ugo. “The plan is to launch at least one opportunity fund that will focus on the US multifamily market space. We are also examining lending opportunities in the US and Europe.” RHB

22 august 2012


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